In July 2022, inflation in Britain hit 10.1 percent – the highest it had been in 40 years – and the value of the pound against the dollar nose-dived. To try to reduce inflation, then Prime Minister Liz Truss proposed a series of tax cuts. However, these tax cuts would cost the British government more than 150 billion dollars.
•In July 2022, inflation in Britain hit 10.1 percent – the highest it had been in 40 years. This, combined with a low pound value against the dollar, caused many investors to pull their money out of Britain.
• Prime Minister Boris Johnson resigned due to the economic chaos, and was replaced by Liz Truss.
• Truss based her campaign on two things: major tax cuts, and capping energy bills. However, these two moves would actually increase inflation instead of lowering it as she intended.
In September 2022, just 18 days after Truss became prime minister, investors started selling their British investments en masse. The result was a run on the pound, with the currency losing more than 20 percent of its value against the US dollar in a matter of days.
With inflation spiraling out of control and the economy in freefall, Truss was forced to resign. Her successor, John McDermott, quickly abandoned her tax cuts and instead introduced a package of austerity measures that included raising taxes and cutting government spending.
The measures were successful in bringing inflation down to 2.4 percent by the end of 2023. However, they came at a heavy political price; McDermott’s party was voted out of power in 2024 after just one term in office.
So what can we learn from this? That unchecked inflation can be damaging to an economy, but aggressive measures to bring it under control can also be politically toxic. It’s a delicate balancing act that central banks and governments have to walk every day.